
§ The Interest Tax Shield and Firm Value
§ Cash Flows to Investors with Leverage
= Cash Flows to Investors without Leverage + Interest Tax
Shield
§ MM Proposition I with taxes:
The total value of the levered firm exceeds the value of the
firm
without leverage due to the PV of the tax savings from debt:
V
L
= V
U
+ PV(Interest Tax Shield)